The Mega-Banks Behind the Meltdown
There is something of a myth surrounding the current economic crisis, how it unfolded, and the precise role of the world's largest financial institutions in the global meltdown. That myth suggests these banks and investment houses were somehow surprised "victims" of unscrupulous subprime mortgage lenders, and that they could not have anticipated the damaging toxic assets that have so infected their balance sheets.
What's missing from this story is the fact that this was a self-inflicted wound for which the rest of us are picking up a massive tab. The largest American and European banks and investment houses were not the unwitting "victims" of an unforeseen financial collapse, as they have so often been portrayed. The mega-banks not only invested in subprime lending institutions - they were the enablers, bankrollers, and instigators driving high-interest lending, and they did so because it was so lucrative and unregulated.
Worse, in many instances these are the same financial institutions the government is now bailing out with tax revenues. How these bottomed-out banks helped cause the financial meltdown can be clearly seen in Who's Behind the Financial Meltdown: The Subprime 25 and Their Wall Street Backers, a new study by the Center for Public Integrity. The Center ran a computer-assisted analysis of every high-interest loan reported by the industry to the U.S. government from 2005 through 2007, a period that marks the peak and collapse of the subprime market. From this pool of 7.2 million loans, our investigators identified the top subprime lenders. The "Subprime 25" were responsible for nearly a trillion dollars of subprime lending, or 72% of all reported high interest loans.
The "Subprime 25", who are mostly no longer in business, were largely non-bank retail lenders who needed outside financing to make their subprime loans. So where did that financing come from? The Center's study found that at least 21 of these Subprime 25 lenders were either owned outright by the biggest banks or former investment houses, or had their subprime lending hugely financed by those banks, either directly or through lines of credit. In other words, the largest American and European banks made the bubble in subprime lending possible by financing it on the front end, so they could reap the huge rewards from securitizing and selling mortgage-backed securities on the back end. The demand was insatiable, and the backing excessive. Between 2000 and 2007, underwriters of subprime mortgage-backed securities - primarily Wall Street and European investment banks - poured $2.1 trillion into the business, according to data from trade publication Inside Mortgage Finance.
Did these major financial institutions not understand what kind of lending was taking place? The poor quality of these loans was no secret. Many of these subprime lenders, the Center found, were forced to pay billions of dollars to settle government charges of abusive or predatory lending practices. This was a period of some of the worst mortgage lending in American history, in which regulators were nowhere to be seen, and normal income documentation and loan standards were thrown out the window. In many cases, though, the big banks really didn't care if the loans were bad. That's because they'd bought "insurance" against them - those infamous "credit default swaps." The swaps sounded good, except they were unregulated, and those selling them - like American International Group Inc. - didn't have to maintain reserves to guard against unforeseen losses.
It was all a house of cards, and some tried to sound the alarm. A look at the historical record shows that Washington was warned repeatedly over the last decade - by consumer advocates and a handful of regulators and lawmakers - that these high-cost loans represented a systemic risk to the economy. It is hard to believe the major banks were unaware of what was going on, or what the consequences might ultimately be.
A typical warning came from William Brennan, an attorney with the Atlanta Legal Aid Society. Brennan had watched as subprime lenders earned enormous profits making mortgages to people who clearly couldn't afford them. The loans were bad for borrowers - Brennan knew that. He also knew the loans were bad for the Wall Street investors who invested in these loans, and then bought the shaky mortgages by the millions. "I think this house of cards may tumble some day, and it will mean great losses for the investors who own stock in those companies," Brennan told a Senate Committee. That was in 1998. Many other unheeded warnings followed.
Despite such warnings, Congress, the White House, and the Federal Reserve all dithered while the subprime disaster spread. Long forgotten congressional hearings and oversight reports, as well as interviews with former officials, reveal a troubling history of missed opportunities, thwarted regulations, and abject lack of oversight. Instead, the financial industry supported more deregulation, along with an extraordinary disregard for the damage being done. This was accompanied by millions of dollars in political contributions to leading lawmakers of both parties from the same financial industry that is in such trouble today.
The truth is these mega-banks invested trillions, made billions, and took risks with their eyes wide open. Now, because they are deemed "too big to fail," they need trillions in government bailouts and guarantees to solve problems they helped create. But let's look at it another way: perhaps these mega-banks are simply "too politically connected to fail" and in reality "too big to survive." Their unbridled political contributions and massive lobbying created the lack of regulation and oversight that led to this crisis. Where is the accountability - of management and boards, of auditors and regulators - for what has happened? It is time to set aside the myth of the mega-bank as victim.
Bill Buzenberg is executive director of the Center for Public Integrity in Washington, D.C.
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These banks were not regulated, they made trillions from sub-prime loans and
they knew the loans were bad. But money talks. The are also powerful lobbyists
in Congress, so again money talks. The are currently fighting the new regulations
on credit cards, but are intent on controlling how much we pay in interest, because
that's a big money maker too. So how far will the economy have to fall before this all
ends?
Finally, a voice of reason! I'm so sick and tired of hearing this damned lie that the conservative media and these foolish corporations have helped spread. Anyone who cares to know the TRUTH behind the "meltdown" should read this article AND CPI's report.
You left out the Crude Oil futures scams and now the ethanol scam and it's effects on commodity futures, and how all this is STILL directly connected to Stock Market levels and profits, it's as simple as saying, the latest stock market "gains" are being financed at the pump by you and me, the auto driver.
Actually, sir, this blog is as awesome as it is obvious, this is the reason so many, SO MANY WE THE PEOPLE, were and are against the bailouts. Why bailout a financial industry that deliberately bankrupts its self and several nations in the process? Not to forget the untold simple human suffering left quaking and most important, UN RESCUED in its wake.
These people and their political class enablers need to be stopped, not rescued.
It was all a house of cards, and some tried to sound the alarm. A look at the historical record shows that Washington was warned repeatedly over the last decade - by consumer advocates and a handful of regulators and lawmakers - that these high-cost loans represented a systemic risk to the economy. It is hard to believe the major banks were unaware of what was going on, or what the consequences might ultimately be.
I do believe one of the individuals sounding the alarm, as early as 2001, was none other than George W. Bush. Congress should be ashamed of themselves for not writing new law, protecting the taxpayer, against bad lending practices. Unfortunately, our law makers benefited from campaign donations, sweetheart loan deals, etc. from these organizations and did not see fit to fix the problem before it spun out of control. I for one would have liked a list of names of lawmakers who were sounding the alarm before this thing came down. I do know this, the president does not write law, congress does, and they facilitated this madness!
You are perfectly right about congress. But i see this going back further than GW.
Look like some of the Dems tried but not too hard. If they really wanted to do someting they could have gone to the news services. they could have really raised hell. Nobody really wanted to make waves. They probably weren't all on the take.but they did nothing.
Like when NYPD Det.Serpico saw what what was happening he did something. Everyone else took the money or just kept quiet.don't make waves.
This all lies at the feet of congrress. Which is why nothing is happening.
Great article Bill. This story with the Brenner report. with those of Bill Black, and Johnson of IMF leaves little doubt the Banksters knew exactly what they were doing. Congress was bought and paid for, laws and regulations changed. They couldn't lose. If they win the money is theirs, if they lose OUR money is theirs.
I'm angry about the money , but I'm more afraid that they intended and DID take over the US Government. The banks are the government.
Banks could have Congress do anything. Any company working through the banks could get anything done.
The investment banks could take over social security. The Insurance/Banks could take over national health Care.
They could set up a national police force with Blackwater at it's head.
Vote all you wan't , It won't matter.
I was surprized to hear Greenspan, a grown man say ...Those of us who have looked to the self intrest of lenders to protect the share holders equity are, I in particular, in a state of shoked disbelief. He was shocked that some big lender wasn't looking out for the little people? Shoked? I know 10 year olds smarter than that.
This is what they had running the Fedral Reserve? Hell , he couldn't keep figures on the side of a cotton trailor for me.
I don't mean to be dramatic but I keep comming back to the same cold reality.
What do we do now? What would Paul Revere and Thomas Jefferson do?
America's capitalists have destroyed American capitalism. Pres Obama, unlike FDR, can't save American capitalism. Since Obama is a capitalist, he is going to have to learn to be a socialist quickly or resign himself to 1 term. Some socialist POTUS, leader or leaders will rebuild America soon or the USA is down the toilet. The survivng American capitalists will flush the toilet on the USA. America's surviving capitalists feel that they will learn socialism & survive as the leaders & organisers of American socialism. America's capitalists won't be around when their ashes are flushed down the toilet & join American capitalism at the world's sewage disposal plants. The capitalists & capatilism will be processed to become sluge fertalizer as the sewage disposal plants cleans the water to be reused. You must remove solid impurities from waste water to make the water fit for human use again.
No the sewage disposal facility won't be named for Obama, Marx or any human who promoted or used a failed economic system. It could be named for Dr Seuss. Life is strange.
No Larry it can be made to work, just put the Republicans back in power, with the full support of the Banks. (Or vice versa) Don't matter.
Let them run this country like a business, get rid all all those costly government programs, social security, medicaide care. destroy the unions, all those retirement crap.
Then they could abolish those costly branches of government. and repalce them with a Ceo Cfo and Board of Directors.
You and I would no longer be citizens we would now be Employees, Do away with all those sille environment controlls and get down to building and foundring stuff. Forget all that freedom stuff now we can belong to a subsidery of a World Wide Corporation.
Willl this work for you?
Republican Jesus went to the Temple, and he set up tables. He invited thieves to attend them, and he smiled as they extracted usury from the poor and homeless. He told his followers to support, and protect, The Money Changers.
http://www.youtube.com/watch?v=kNqQx7sjoS8
The Republican Bible is online. Check out what Jesus says ~48 seconds in.
Oh , OK now it's clear.
We are told that regulations don't exist right now to cover the range of financial misdeeds that have wrecked the economy & are systematically destroying the fragments of democracy we have left. Legislators are owned we are told by one of their own as if it weren't obvious. Will some constitutional scholar tell me why Obama can't issue Executive Directives that will stop this Wall Street plunder? Why was Bush able to short circuit legislation w/ signing memos & assorted "directives"? Let Obama hang the congress out to dry w/ directives that legislators might have to overturn & expose themselves to more public disdain when/if they align themselves w/ the most corrupt of the financial lords. Yeah, it's scarey for the executive. Ruthless characters directing our future right now.
Two seperate branches , Legislature and Executive no one bosses the other besides Obama took their money too.
Obama took no PAC or lobby money... And you know that.
http://www.politico.com/blogs/bensmith/1008/A_huge_September_150_million_for_Obama.html
Oh for the good ole days when Oliver Cromwell walked into Parlliment and kicked them all out.
These financial institutions were too well connected in Washington to be allowed to fail. They gave us the illusion of making money while they cooked the books and bought off politicians and regulators alike. Everybody knew it was a scam. I mean come on - a "liar's loan" or a NINJA loan..... wink, wink, and a nod.
I have been predicting the real estate market would tank and that the derivatives would blow up for lack of proper ratings...triple "A"?
America needs to grow up and stop the crooked politicians from assisting in the looting of the Treasury and the destruction of the middle class. All hypocrisy. Just total BS from our crooked politicians who are in on the looting and outsourcing.
It is high time that we realize that our government is a de facto oligarchy of bankers. Much as the Republicans who try to fight Rush Limbaugh are, to a person, brought to their knees in abject apology, we are finding that bank lobbyists can must enough votes to frustrate financial reform.
We are left standing on the sidelines wondering, "Whew! I wonder why the banks are treated so gingerly while car manufacturers and their labor forces, creditors and subsidiary parts suppliers are made to come grovelling to the table of government supervised reform?" Follow the money.
"Frankly, they own the place." R. Durbin (D, IL)
We're a government of the banksters, by the banksters, and for the banksters...not the people..!
Simple as that...
The tragic thing is . You aint kidding, It is true. As real as King George, as real as taxation without representation. It is here.
Does anybody else think we could have been better off if the government had sent each taxpayer 1 Million dollars? With approx. 300 million citizens, the housing crisis could have been averted much cheaper than sending an unending stream of money to the banks!
Now you really sound like one of us leftie commie, liberals! Way to go!
Are you saying leftie commies are bad at math.
Straw. "Too big to fail" has nothing to do with the banks being the victim. No one ever said they were, or at least no one that matters. It means that if we don't bail them out, we'll have an even worse mess to deal with.
You are asking the American people to pay the debts of a criminal enterprise, just because of the magnitude of that enterprise.
If a security is fraudulent, it is a fraudulent contract -- hence, "null and void." It is neither an asset nor a liability.
Plenty of Senators and Congressmen who are hip-waders deep in this thing don't want this thought to be uttered in public, but here it is:
(1) Knowingly, willingly, and with the intent to defraud, trillions of dollars of securities were issued.
(2) Knowing or having reason to know otherwise, Moody's (et al) with the intent to defraud attached false ratings to them.
(3) The US Congress aided and abetted the crime by removing laws and by enacting enabling law.
(4) Knowing or having reason to know that a crime was afoot, the SEC (et al) took no action.
Hence: (5) Today, all 305 million of us are PLAINTIFFS.
So should we punish the plaintiffs along with the perps? Or should we get through this one with the least harm we can, and change the system so it doesn't happen again?
I liked the phrase To Connected to Fail!
It's an improvement over just "too big to fail", but not satisfactory imo. Here's my take on systemic risk, for what we need to be thinking about so we don't get into a similar mess again.
http://dsws-was-here.blogspot.com/2009/05/seven-metaphors-for-systemic-risk.html
Agree about the straw man. The article's not bad as a rehash of how the investment banks got us into the mess, but as far as stating a main argument and then backing it up, it sure goes nowhere.
The banks aren't "too big to fail", only "too politically connected to fail?" They certainly are politically connected, disgustingly so. But that still doesn't mean they aren't too big to fail, as sickening as the notion is, and Mr Buzenberg simply doesn't do anything to back up his assertion.
Letting them fail (a la Lehman Brothers) was leading to a freefall as one failure seemed to trigger another one which triggered another one, etc.
Do we know for a fact that is what would've happened? No. The point, for the moment, is that Mr Buzenberg doesn't say anything to show that it wouldn't have. And that seems to be a pattern with most people arguing against the bailout efforts.
- Craig
Why isn't the Federal Reserve being held accountable for this? Their low interest rates and fractional reserve banking were precisely the reason why so many banks were able to get so much money to loan out.
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